FX.co ★ Collins and Barkin urges patience on interest rate cuts

In the previous article, we discussed that the European Central Bank is not in a rush to lower interest rates, though it may happen for the first time in early summer. Everything depends on inflation, and this response could come from any representative of any central bank at the moment. While this answer may not satisfy most people, there is no better alternative.

On Wednesday, Federal Reserve Bank of Richmond President Thomas Barkin urged patience on rate cuts. He mentioned that the inflation forecast remains uncertain, and the risks of an acceleration in the Consumer Price Index could become more prominent in the near future. Despite inflation showing significant improvement in the last six months, according to Barkin, there is still a considerable way to go to achieve the 2% target, and the final leg will be the most challenging. Barkin also expressed concerns that the significant decline in goods prices might be a "head fake" and might rebound in coming months, requiring the central bank to maintain rates at peak levels for a longer period.

Boston Federal Reserve Bank President Susan Collins agrees with this perspective. On Wednesday she said that the Fed is prepared to embark on monetary easing in 2024, but the journey towards achieving 2% inflation could be difficult, lengthy, and challenging. Therefore, determining when the first rate cut will occur is very challenging. Collins said she's looking for more evidence that inflation is set to align with the 2% target before moving to cut interest rates. In her view, when the easing process begins, the rate should be reduced gradually. To achieve the inflation target, the U.S. economy must slow down more significantly.

Collins also believes that wage growth will have to slow down more for inflation to reach 2%. I, in turn, can only add the following: none of the central banks will be in a hurry to lower interest rates. However, the Bank of England, the European Central Bank, and the Fed are in different economic conditions. While the economic growth in the United States can be considered high despite its high interest rates, this is basically non-existent in the UK and the EU. While it is a soft landing for the US, and a recession is unlikely, the risks in the EU and Britain are much higher. I still believe that the ECB and the BoE will not lag far behind the Fed in the rate cut process.

Based on the analysis, I conclude that a bearish wave pattern is being formed. Wave 2 or b appears to be complete, so in the near future, I expect an impulsive descending wave 3 or c to form with a significant decline in the instrument. The failed attempt to break through the 1.1125 level, which corresponds to the 23.6% Fibonacci, suggests that the market is prepared to sell a month ago. I am currently considering selling.

The wave pattern for the GBP/USD pair suggests a decline. At this time, I am considering selling the instrument with targets below the 1.2039 mark because wave 2 or b will eventually end, just like the sideways trend. I would wait for a successful attempt to break through the 1.2627 level, which, hopefully, everyone managed to open. Take note that after a daily decline, the instrument may temporarily rebound, but I only expect it to fall further.